Despite Dan Andrews instructions to get on the beers, it seems we have switched as a nation from beer to wine. Australian consumption preferences are now bottled wine is 34% of the market, regular strength beer 19%, although if you add mid and low strength, total beer is 33% bottled spirits are around 15% and then there is the rest.

Treasury is in the market if flogging us wine, they hold some respectable brands including Penfolds. 

The business has been significantly covid restriction, supply chain interruptions, and China no longer friends with Australia impacted – if you recall they slapped 200% tariffs on Australian wine imports. 

The company is attempting to circumvent this by growing grapes for Penfolds in France. CEO Tim Ford said the company plans to launch a French collection of Penfolds. Ford said, “It’s going to take us multiple years as we build up our luxury wine portfolios out of France and America to really meet that demand over time, and we look at that as a long-term journey to rebuild our market there in China.”

Results released today for the half ending December ‘21:

• Revenue of $1.27 billion, down 10.1% year-on-year 
• Earnings before a myriad of acronyms of $262.4 million, down 6.7% year-on-year 
• Net profit after tax of $109.1 million, down 7.5% year-on-year
• Interim dividend of 15.0 cents per share fully franked

The market though this was ok, mostly as the business managed to grow without China. 

Ford said the business is shifting from ‘recovery and restructuring’ to one of ‘growth and innovation’. 

This is where you must have a leap of faith that restriction and supply chain issues will see consumers returning as before, and they can resurrect the China market by other means. In my mind this is the primary question, but competitors are not going to sit on the sidelines. 

This one is not currently on my shopping list. I still like beer.

Interesting article in The Age 15/5 about Treasury's US expansion using Snoop Dog as their front for advertising.  Getting good uptake in the younger/cheaper market.  Worth a read.  May give the direction required during China woes.  I do think they will execute in to other parts of Asia reasonably over time.  It wont be massive growth but could be steady over many years.

With the news that the Beijing Ministry will apply a tariff rate of between 107 per cent and 212 per cent on Australian wines, there has been considerable political chat, but not much discussion about what this implies for the valuation of this blue-chip ASX company.

Let's take a quick back of the envelope look at what is the worst-case scenario and then build our investment case from there. For the below analysis, I have looked at the NSR (net sales revenue), EBITS (earnings before interest, tax, SGARA and material items) and NPAT (net profit after tax) of Treasury Wine Estates at the group level AND ex-Asia.

Looking at the group level results ex-Asia is extremely conservative for 2 reasons. Firstly, China obviously does not comprise 100% of TWE's Asian sales and profits. Secondly, even with harsh political tariffs on Australian products, it is not going to eliminate all of TWE's China sales/profits. But, regardless, let's look at this because it gives us a baseline for what is the absolute floor in the share price.

I am also using FY19 results not FY20 results, which were impacted by lockdowns around the world. This is because any investor buying into TWE at this stage is no doubt investing on the thesis that the world will emerge into a post-lock down world in CY2021 and beyond. The markets are forward-looking and the norm for TWE moving forward is a non-lockdown world. This is a blue-chip company and it has decades that lie ahead of it.

Post trading halt, the share price stood at circa $9 after the stock was sold off approximately 11% on the last trading day. $9 equates to a market cap of circa $6.5B AUD. This corresponds to a PE multiple of 15.5x for the Group level and a PE multiple of 28x for the Group level Ex-Asia on FY19 results. I.e. At $9, you are paying a PE of 28x if you assumed that the entire Asian division of TWE was eliminated entirely.

What is a fair value earnings multiple for TWE?

• The historical 5-year average PE ratio of Treasury Wine Estates Limited is 25x
• The PE ratio of TWE's peer group (Constellation Brands, Jiugui Liquir Co, United Spirits, Compania Cervecarias, Remy Cointreau) is 27x
• The PE ratio of the sector (Distillers & Vintners) is 23x

Conclusion:

My conclusion is that even when you consider the extremely conservative and hypothetical scenario in which TWE's Asian operations are eliminated entirely, the current share price ($9) already prices this in. At $9, you are paying an FY19 PE of 28x for the business EX ASIA. This is in-line with TWE's 5-year historical PE average. This is in-line with TWE's peer group PE. This is in-line with the PE ratio of the sector. The share price at $9 is an excellent bet for a long term hold.

T.E.P.